Why Chinese banks are good for Britain

By: Published on: November, 2013

Allowing China’s financial institutions to establish wholesale branches in the UK is a major step in cementing London’s pre-eminent role in global finance. It holds out the promise of greater investment flows into Britain’s recovering economy, while making it easier for British companies to export to China, writes Janet Ming, Head of RBS China desk in London.

The deal is a win-win for both countries. By becoming a branch
of the parent company, rather than a locally incorporated
subsidiary,
Chinese banks can draw on far greater liquidity from their
overseas headquarters.

The agreement between chancellor George Osborne and
vice-premier Ma Kai will largely release UK-based branches from
the Prudential Regulatory Authoritys heavier regulatory
requirements and put them in the orbit of Chinese
regulators.

Overseas branches will also be able to leverage the credit
rating of their parent  with its greater financial
firepower. That is significant in an environment where
companies are paying more heed to their banks
counterparty risk.

For Britain, the financial community should welcome a deal
that secures Londons lead in
renminbi trading outside China and Hong Kong. London
handles 62 per cent of all offshore renminbi trading outside
Greater China according to SWIFT, the global payments company.
But cities such as Paris, Frankfurt and also Luxembourg 
where several big Chinese banks have already established
European headquarters  are vying for a slice of a growing
market.

In fact, trade in offshore renminbi has more than doubled in
the past year and it can only expand further given Chinas
aspirations for the currency to one day rival the dollar and
euro as a global reserve. For London to remain top dog in the
renminbi market, the UK had to give Chinese banks greater
scope to operate in the UK.

The deal is much more than just a boost to the City, however.
It gives Chinese companies real confidence to invest in
Britain. If Chinese banks that can more easily fund the foreign
operations of their customers, those firms are more likely to
invest. Europe is widely perceived by the Chinese business
community as being a friendlier destination for Chinese
investment than the United States. This agreement only
strengthens Europes position.

Making it easier to invest in the UK is good news for an
economy looking for new sources of FDI  particularly for
the kind of major infrastructure projects in which the Chinese
have become experts over the past 20 years. Chinese investment
in the UK almost doubled to USD2.7 billion in 2012, according
to Chinas Ministry of Commerce.

Chinas involvement in a consortium about to build two new
nuclear power reactors at Hinkley Point in western England is
immediate evidence of that. The two countries are in fact a
very good fit: China is keen to tap Britains knowledge
economy and its expertise in areas like product design while
Britain would like access to Chinas vast financial
resources.

British companies are well positioned to take advantage of
changes in the
Chinese economy. Government efforts to rebalance the
Chinese economy are providing a shot in the arm to service
industries like banking and insurance  sectors where the
UK has obvious strengths. Better banking links between the two
countries should help British exporters and mend a badly
lopsided balance of trade. Britain exported USD9.5 billion of
goods and services to China last year but imported USD52
billion from the PRC according to IMF data.

Countries such as Germany may have stolen a march on British
exporters in the last decade, but as China adopts a less
industrial economic blueprint, UK firms have a chance to catch
up.

Osbornes charm offensive with London mayor Boris Johnson
is also a gesture of the importance the UK government attaches
to the relationship. Diplomatic links were damaged by David
Camerons meeting with the Dalai Lama last May. The
chancellors high-profile visit and the UKs decision
to relax visa requirements helps reset that relationship.

Cutting the bureaucratic mess Chinese visitors go through to
enter Britain not only encourages the business community. It
also taps into the vast potential of China as a source of
tourist pounds.

World Bank figures show
China will have the largest middle class in the world by
2020  a vast potential pool of visitors to the UK. Yet
currently, the vast majority of Chinese visiting Europe bypass
Britain to travel on one visa through France, Italy and the 22
other states inside the Schengen area. The UK government was
right to act.

So what will these pacts mean for the Chinese economy?
Primarily they are a further step towards the creation of a
fully international renminbi.

Despite accounting for more than 10 per cent of world trade,
less than 1 per cent of trade deals are settled in renminbi
according to SWIFT. China has already made the current account
fully convertible and the countrys new leaders are likely
to follow up by also making the capital account convertible in
the coming years.

Chinas decision to grant London-based institutions
greater access to Chinese markets proves its commitment to both
London as well as the liberalisation of its own financial
system. The RMB80 billion (GBP8.2 billion) quota granted under
the Renminbi Qualified Financial Institutional Investor
programme will enable investors in London to buy
renminbi-denominated stocks, bonds and money market instruments
inside mainland China.

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